The European Commission published the proposal for a Directive (the most common form of legal act in the EU, setting out an objective to be achieved) on Sustainable Corporate Governance on the 23rd of February, which seeks to ensure that businesses address the adverse impacts of their actions, in their value chains both inside and outside of Europe.
The activities of European companies regarding human rights and the environment are envisioned to be put under increased scrutiny, while at the same time allowing consumers and investors an increased level of transparency. While several individual member states have already previously implemented similar measures, the European Commission is now looking towards a more measured and large-scale approach with this Directive.
According to the official press release issued by the European Commission, the proposal covers the following groups of companies:
– EU limited liability companies with 500+ employees and EUR 150 million+ in net turnover worldwide.
– Other limited liability companies operating in defined high impact sectors, which do not meet both the abovementioned thresholds of 500+ employees and EUR 150 million+ in net turnover but have more than 250 employees and a net turnover of EUR 40 million+ worldwide. It should be noted that for these such companies, the rules will start to apply 2 years later than the previous group of companies.
– Non-EU companies active in the EU with a turnover of EUR 150 million or EUR 40 million generated within the EU.
Small and medium enterprises (SMEs):
– Small and medium enterprises are currently not directly within the scope of the proposal, however as the proposal provides for certain supporting measures for SMEs, such companies may be indirectly affected in the future.
The relevant companies will now have to adhere to a corporate due diligence duty in which they will have to identify, cease, prevent and/or mitigate human rights and environmental impacts in their own operations, within their subsidiaries and throughout their value chains.
In addition, certain large companies will have to implement plans to ensure that their business strategy is compatible with limiting global warming to 1.5 °C, in line with the Paris Agreement (the first-ever universal, legally binding global climate change agreement).
Directors of such companies shall also contribute to overseeing the implementation of the due diligence processes and integrating due diligence into their corporate strategy. In addition, a director’s duty to act in the best interest of the company (one of the obligations owed by directors to the company), must take into account the human rights, climate change and environmental consequences of their decisions according to the Directive.
Compliance will be monitored by Member States, which will also be in charge of taking action in cases of non-compliance.
Such mandatory sustainability strategies and transition plans may be vital in achieving the E.U.’s 2050 carbon neutrality targets, with the burden on companies being the costs of establishing and operating the due diligence procedures and implementing the changes in operations and value chains to comply with their respective due diligence obligations.
The proposal will firstly proceed to the European Parliament and the Council for approval. and once adopted, Member States will have two years to transpose the Directive into their national law and communicate the relevant transposed legislation to the Commission.